Do you want to learn more about margin trading and how to get started with it? It can be confusing to understand at first, and you need to know the benefits and risks. If you’re thinking of using margin trading, then keep reading as we’ve put together a useful guide. We will cover the ways in which margin trading can be useful, as well as the risks involved. So, you can make an informed and educated decision as to whether or not margin trading could work for you.
What Is Margin Trading?
Margin trading allows you to borrow money from brokers for you to then reinvest in financial investments. This type of trading requires you to set up margin trading accounts rather than trading directly from cash accounts. Different brokers will have different terms in their agreements as to how much funds need to be in the margin account at all times. So, you need to research this before choosing who to borrow money from. If the funds in your account drop below a certain level due to losses, the broker will contact you and ask you to either add funds or sell some of your assets; this is known as a margin call.
Benefits Of Margin Trading
The benefit of margin trading is that it releases capital that you can use to make more investments than you would usually be able to. This means there is then more opportunity to make bigger profits from your investments. Over the short-term, margin trading can be helpful for investing in stocks that you see as profitable but that you wouldn’t invest your own money in immediately.
Risks Involved In Margin Trading
There are more risks involved with margin trading than regular trading. Because you’re using borrowed money to invest, it does mean there is the potential for bigger losses. The stocks you have invested with the money you’ve borrowed are used collateral should you be unable to pay back the money. So there is more opportunity to lose your investments. If you fail to take action when requested to add funds or sell assets from a margin call, the broker can liquidate your account’s assets.
Sensible Margin Trading
There are certainly risks involved with margin trading, but there are ways for you to help make more sensible decisions when it comes to taking out these loans. Firstly, never borrow more money than you can afford to pay back. If you’re unable to pay the loan back, you will end up losing a huge amount of your assets and stock investments. Secondly, try not to make high-risk investments with these loans. Make sure you are clear on the terms set out by your broker and the margin maintenance level for your margin account. Take time to think about whether you would safely be able to meet any potential margin calls. Don’t borrow too much straight away. Allow yourself to build up experience and confidence with smaller investments before borrowing larger amounts of money.